EOP, Cornerstone merge to form $18B company

CHICAGO and NEW YORK - Equity Office Properties Trust and Cornerstone Properties Inc. have entered into a merger agreement in which Cornerstone will merge into Equity Office to form an $18 billion office company. Once the merger is completed, Equity Office will own and operate 380 office buildings consisting of 95.5 million sq. ft. nationwide, a 24% increase in portfolio size based on square footage.

"We don't believe in being big just for the sake of being big," says Zell. "We believe in our platform as a network, and we believe we've created the strongest network in the nation."

The deal values Cornerstone at $4.6 billion, which includes transaction costs and the assumption of $1.8 billion in debt. Equity Office will pay approximately $1.1 billion in cash and issue 63.6 million new common shares and operating partnership units. New York-based J.P. Morgan and Charlotte, N.C.-based Bank of America reportedly will lead a $1.5 billion credit facility for EOP's acquisition.

More than 12.5 million sq. ft. of Cornerstone's holdings are in Equity Office's top eight core markets, according to Equity Office president and CEO Timothy H. Callahan. Cornerstone's portfolio includes 12.3 million sq. ft. in Boston; 11.2 million sq. ft. in Chicago; 5.5 million sq. ft. in Washington, D.C.; 6.3 million sq. ft. in San Francisco; 6.8 million sq. ft. in Seattle; and 7.8 million sq. ft. in Atlanta.

Equity Office expects the merger to be modestly accretive in 2000 and 3 cents to 5 cents accretive in 2001, Callahan says. Yields on the transaction in the first 12 months are expected to be approximately 9.5% on a GAAP basis, 9% on a cash basis and 8.7% for EBITDA. The merger should save the combined companies $24 million in the first year, Callahan says.

Upon completion of the merger, Equity Office will expand its board from 11 to 14 members. New members will be John S. Moody, president and CEO of Cornerstone; Jan H. W. R. van der Vlist, director of real estate for Dutch pension fund PGGM; and William Wilson III, chairman of Cornerstone's board of directors.

RESTON, Va. - Consumer confidence in Internet shopping has come to the forefront in light of recent online hacking incidents. In a survey conducted in February by Reston, Va.-based PC Data, 45% of Internet users surveyed said they are less likely to use their credit cards over the Internet due to recent hacker attacks. Thirty-seven percent of those polled felt Internet security in general was not as safe as they had first believed, and 50% said they changed their opinions of specific Websites that were disabled by hackers. Some of the sites affected included Yahoo! Inc., Amazon.com Inc. and eBay Inc.

According to PC Data analyst Julie Oliver, these results indicate that hacker attacks could slow online shopping as consumers grow wary of Internet security. Oliver believes consumer confidence will return if the hackers are arrested.

Bill Carpenter, CEO of E outlets.com, a division of Baltimore-based Prime Retail, says, every company that has a Website should make security a primary concern. "Hacking has caused everyone to take a serious look at their systems and to make sure that their security measures are conveyed to the consumer," says Carpenter. "Also, companies should give the consumer the information that their secure site is a safe box for them to do business in."

Some dot.com companies are investing in insurance that covers e-commerce losses and protection against lawsuits. According to Lloyd's of London, an e-commerce insurer, eBay alone lost $5 million in sales and $4 billion in stock value after a hacker closed down its site for 22 hours.

SACRAMENTO, Calif. - The California Public Employees' Retirement System (CalPERS) has established two equity investment programs totaling $300 million. A $200 million program will invest in seniors housing properties, and a $100 million will invest in "smart growth" urban communities in northern California.

Funding for the seniors housing program should begin this summer, according to CalPERS. During the next few months, the organization will conduct a search for investment managers. The focus of the program will be on independent living facilities, says Brad Pacheco, a CalPERS spokesman, but the fund will also invest in assisted living communities and will consider continuing care communities.

Pacheco says CalPERS does not feel uneasy about making such a commitment to seniors housing, an industry that has struggled at times in recent years. "With the baby boomers retiring, we want to be in on the ground floor," he adds.

With the urban equity program, CalPERS will prefer to invest in mixed-use communities that will promote, among other things, reductions in car use and suburban sprawl, says Pacheco. The program will fund new construction and the renovation of existing buildings in urban areas.

Funding for the urban program is expected to begin by August. Meanwhile, CalPERS will interview 12 real estate firms to find investment partners. The organization is looking for "partners to co-invest in the infill projects and operate under performance-oriented fees schedules," according to a CalPERS press release.

CalPERS has undertaken a similar program before. Last year, the organization established a $100 million partnership with Los Angeles-based CommonWealth Partners LLC to invest in urban areas in Southern California.

ATLANTA - The Mills Corp. of Arlington, Va., in a first-ever naming-rights partnership with Discover Financial Inc., has opened up a new frontier for shopping centers. Mills has just renamed its Sugarloaf Mills project to Discover Mills, a 1.3 million sq. ft. mall currently under construction in Atlanta.

The deal, which will offer consumers numerous incentives for using their Discover cards, is estimated to be worth $10 million. The center is expected to open in the fall of 2001.

According to Tony Wells, vice president of partnership marketing and sales for The Mills Corp., the naming-rights partnership seemed a logical next step. For almost three years, says Wells, the Discover card has been the preferred credit card of The Mills Corp. properties.

"We thought the name [Discover Mills] made sense, and we think the consumer relevance is very prominent," says Wells. "We just thought it was a great marketing marriage."

Although programs are in the preliminary stages, some of the services Discover may offer consumers are: a storefront where shoppers can check their credit card balance; special value-added programs, such as a buy one, get one free promotion; and an additional cash-back percentage over the traditional 1% Discover offers all cardholders. Other rewards for using the Discover card at Discover Mills include free shopping bags, coffee or gift wrapping, concierge service and valet parking.

Along with the marketing opportunity for the Mills Corp., Wells believes the partnership will add 50 basis points to the company's net operating income (NOI).

"Discover's power is its card member base, its value-added component and the great merchant relationships the company brings," says Wells, "We intend to tap as many of those opportunities as possible."

As for Discover Financial Inc., the company could not be happier with the arrangement. According to Elisha Zatkowski, the company's public relations manager, "It makes perfect sense for Discover card. Nothing makes more sense than being part of a mall when you are a credit card company."

Zatkowski says the partnership will allow the advantage of promotion testing before going nationwide. Wells adds that the storefront will provide better exposure for Discover Financial's other services, which include savings accounts, CDs, auto insurance and cash cards.